On April 27, 2023, Bill C-228, An Act to Amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act and the Pension Benefits Standards Act, 1985 received Royal Assent (“Bill C-228”), which means that it will be passed into law. The short-hand name for Bill C-228 is the Pension Protection Act, which should give readers a hint as to the overall goal of this new legislation.
Both the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”) and the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (the “CCAA”) contain various provisions that set out the priority of creditors when a business participates in the bankruptcy or in restructuring regimes. Upon bankruptcy, restructuring, or a plan of arrangement under the CCAA, many creditors who were in an advantageous position vis-à-vis other creditors pre-bankruptcy can find themselves much worse off as a result of these provisions.
In the past, Parliament recognized the need to protect employer-funded pensions where businesses were in financial distress. An example of this is in 2009 when Section 81.5 was introduced into the BIA. Section 81.5 provides that the following “debts” of a business have a “super-priority” over other debts of the business in a bankruptcy, including:
- Pension amounts deducted from employees’ remuneration, but that have not yet been remitted;
- The ordinary contributions required to be paid by employers to pension funds; and
- Contributions owed to defined pension plans and pooled pension plans.
This priority position of pension contributions is significant, as it only ranks below the rights of the following:
- Unpaid sellers to repossess goods;
- The rights of farmers, fishermen and aqua culturists to repossess goods;
- Deemed trusts under Section 67(3) of the BIA; and
- The unpaid wages of employees.
Another example of Parliament recognizing the need to protect pensions is Section 6(6) of the CCAA, which states that the court may not approve any plan of arrangement unless the proposed arrangement provides that the funds similarly described in Section 81.5 of the BIA will be paid in full. This means that upon the bankruptcy, restructuring, or plan of arrangement of a business, any ordinary pension contributions that the employer has not made will rank ahead of any and all secured and unsecured creditors. This is atypical in that, in a non-bankruptcy situation, secured creditors would always rank ahead of almost everyone.
These 2009 amendments to the BIA were important steps for protecting employee pensions during an employer’s bankruptcy. However, what these amendments did not protect were any special contributions an employer was required to make to liquidate an unfunded liability or a solvency deficiency in a defined pension benefit plan.
The above is exactly what has been addressed by Bill C-228. Specifically, these special contributions to deal with underfunded pension plans will also have a “super priority” under the BIA and the CCAA, which further adds protections to employee pensions during an employer’s bankruptcy or restructuring.
These amendments to the BIA and the CCAA will be enforceable beginning on April 27, 2027, giving employers, lenders, and all interested parties four years to consider how Bill 228 will impact their businesses.
With that said, and although Bill 228 does offer greater protection for employee pensions upon an employer’s bankruptcy, there may be significant consequences for employers trying to govern their pre-bankruptcy financial affairs.
In particular, it may impact an employer’s ability to obtain funds from lenders. This is because, generally, a secured lender is seeking a high degree of certainty regarding any financial obligations that may rank ahead of them. The issue with a potentially unfunded liability in a defined pension benefit plan is that the amount of indebtedness will not be certain until insolvency proceedings commence. This means that there will be no certainty of the amount to be given super priority ahead of a secured lender until after a business is already participating in the bankruptcy or CCAA regime. At the time of potential lending, a secured lender will not be certain about this potential amount, which may lead to issues with businesses obtaining loans. Absent this certainty, a lender may be deterred from offering financing at all. Alternatively, it may increase the cost of such financing or require additional collateral from employers.
The takeaway for businesses with employees and a defined benefit pension plan is to be aware of this new bankruptcy pension priority and the effect it may have on the ability to secure financing.
Amanda E. Coleman, Student at Law